Tuesday, May 05, 2009

US Banking, a Hinge of History

Aside from his political views, I never cease to be amazed at Warren Buffett's genius. It was no coincidence that over the weekend, before substantive details of the Treasury's bank "stress tests" are revealed, Buffett was waxing euphoric over Wells Fargo at the Berkshire Hathaway annual meeting. The Oracle went so far as to say that if there was one stock he would put his entire net worth into, it would be Wells. Wow. That is a public relations triple howitzer. Not surprisingly, it was good for a 20+% gain for WFC on Monday, muting the news that the government is going to ask Wells to raise capital. The good news for Wells is that, at worst, they raise a couple billion, of which Berkshire would take a big chunk. But frankly, as I've said before, if were them, I'd sue the feds. The TARP money was essentially forced upon them, the conditions were changed ex post facto, they are facing resistance in giving it back, they've been forced to cut their dividends, and now the government is demanding they dilute shareholders based on an unlikely Depression era economic scenario and arbitrary capital rules that run counter to decades of bank regulation practice. I repeat...I'd sue. All of this should be a bridge too far, especially for a company like Wells that did the government a favor by sweeping up the mess at Wachovia, which could have been a disaster for the FDIC.

Of course this is not the only tactic to employ. A strong bank could play along with the government and seek to benefit as the heavy hand of the government wrecks some of the competition. This appears to be the game plan that Jamie Dimon is following. Yesterday, he said that JPM stands ready to acquire banks that the feds think aren't up to snuff. While this is a tad cynical and not ultimately good for the dynamism of American capitalism, I am not too upset as a JPM shareholder. Obama has eight years at the most and his influence could easily wane much faster, so it is not implausible that JPM scoops up otherwise decent bank assets - long term assets - at distressed levels, which will accrue to JPM shareholders' benefit long after Obama is gone and US banking returns to normal. We could well look back on this era and say that JPM, posing as an altruistic corporate citizen, looted its competitors with the imprimatur of the federal government. (Concerning TARP, Dimon has spoke numerous times recently of "what is good for the country", despite being one of the most shareholder-focused CEOs in America.) Again, fine for JPM shareholders, but this is crony capitalism or some other such variant of directed capitalism, it is not dynamic, Schumpeterian American capitalism.

History hangs on individual actions, it is not foreordained. The direction of the US economy and American capitalism could be tied up in the actions of one or a handful of banking institutions in the next couple of months. Who goes along, who resists, who questions authority, who makes an alternative case, who stands on principle, who plays the angles? These are the questions of great import. These are the hinges on which history turns. It is both scary and exhilerating.

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